Sunday, December 18, 2016

U.S. Toughens Stance on Global Airline Partnerships, Cheering Smaller Carriers: Officials mark shift by setting tough conditions for Delta-Aeromexico pact, denying American-Qantas application

The Wall Street Journal
Dec. 16, 2016 2:52 p.m. ET

U.S. officials are stepping up scrutiny of partnerships between American and foreign airlines, a shift that could help smaller carriers that say such alliances hurt their ability to compete in an increasingly consolidated industry.

The Transportation Department on Wednesday affirmed a decision to impose stiff conditions on a partnership proposed by Delta Air Lines Inc. and Aerovias de Mexico SA, or Aeromexico, that nation’s No. 1 carrier. Last month the department denied an application for antitrust immunity from American Airlines Group Inc. and Qantas Airways Ltd.

That marked a shift from more than two decades of favorable decisions for airlines sharing pricing, schedules and revenue with foreign partners. A Transportation Department spokeswoman said the agency must consider competition and whether such proposals create substantial public benefits.

Delta Chief Executive Ed Bastian declined to comment Thursday on the conditions the two carriers have seven days to accept or reject, saying only the airline was looking forward to completing a separate plan to boost its equity stake in Aeromexico to 49% from 4.2%.

When the DOT proposed the conditions on Nov. 4, Delta Chief Legal Officer Peter Carter said they might prompt the airline to scrap the partnership, calling them unprecedented. “It feels frankly like a significant overreach.” Mr. Carter earlier said the planned equity investment wasn’t contingent on the antitrust ruling.

American said it was disappointed with the blocking of a partnership that the government contends could harm competition in the U.S.-Australasia market. American has another application pending to deepen cooperation with Latam Airlines Group SA, South America’s largest airline.

The decisions were a victory for smaller and midsize carriers that lack such agreements. These airlines have pressured the Obama administration to scrutinize plans they say limit their ability to expand abroad. Southwest Airlines Co., for instance, said it has tried repeatedly and largely failed to expand its limited presence in Mexico City and thinks more gates and landing slots there should go to low-cost U.S. carriers.

Southwest welcomed the department’s ruling on the Delta-Aeromexico partnership, as did Hawaiian Holdings Inc. JetBlue Airways Corp.

JetBlue Chief Executive Robin Hayes wrote to Transportation Secretary Anthony Foxx on Dec. 2 commending the decision, and said in an interview the industry “is at a real tipping point for competition.” He added there was “an increasing sense of alarm about the lack of competition going forward and the roles smaller airlines play.”

Kenneth Quinn, a former government lawyer who runs the aviation practice at Pillsbury Winthrop Shaw Pittman LLP, said he wondered if “buyer’s remorse” was emerging after the Justice Department approved a wave of airline mergers. Nixing American’s partnership and toughening the conditions to Delta’s “appears to represent a sharp departure from precedent,” Mr. Quinn said.

The Transportation Department declined to make Secretary Foxx or other senior officials available to comment.

Some in the industry say they believe President-elect Donald Trump’s administration will look more favorably on such antitrust-immunity agreements, and return to approving them, perhaps with fewer conditions.

“You’ll see a return to prior practices,” said Katie Thomson, former DOT general counsel who runs the transportation group at Morrison & Foerster LLP.

Mr. Trump’s nominee to take over the Transportation Department is Elaine Chao, who served as deputy secretary there under President George H.W. Bush and Labor Secretary under President George W. Bush.

Antitrust-immunity agreements arose in the early 1990s because U.S. and foreign laws prevent cross-border mergers with airlines in much of the world. These workaround pacts are only approved if the U.S. has negotiated an “open skies” treaty with the partner airline’s country.

The Justice Department is often skeptical of such deals, according to people familiar with these applications. But the Transportation Department has consistently determined the partnerships give consumers more flight options and a more seamless travel experience without unduly raising fares. The three largest U.S. airlines—American, Delta and United Continental Holdings Inc.—have multiple partnerships with European and Asian airlines and are working to strike them in other regions.

When a partnership affects a congested airport, officials sometimes require airlines to surrender landing slots or make other concessions.

The Transportation Department said Delta and Aeromexico would need to divest 24 slots at Mexico City International Airport, 16 more than Mexican antitrust regulators stipulated. The U.S. also said the partners must drop eights slots at New York’s John F. Kennedy International Airport. The government also put a five-year duration on the partnership, a restriction that apparently hasn’t been required before.

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